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Ailing Euro Threatens European Unity

June 21, 2011

Having a common currency looked like a fast track way to make a united Europe a superpower to rival the United States. Now it turns out that the hidden costs of a common currency are pitting wealthy EU nations like Finland and Germany against weak countries like Greece and Spain. The original intention was that the EU states would have their national budgets very tightly balanced. With time, it could no longer be concealed that citizens and governments of the less prosperous nations had been maxing out their credit and attempting to cover their tracks. Then, the European Union crafted one bailout package after another, involving further extensions of credit.

Anyone who has ever borrowed from one credit card to pay another can understand what Greeche, Spain and other financially troubled EU nations are trying to do and how it just aggravates the problems they face. The rift between Northern European lender nations and Southern European nations who are borrowing to balance their books is growing wider, with Germans and Finns angry at Spaniards and Greeks who are adding to their tax burdens. Conversely, workers who are already struggling in debtor nations feel that they are bearing the brunt of austerity measures.

In the old days, each nation had its own currency. If the currency was weakened by debt, the value of the currency went down and borrowing became more expensive. On the other hand, the nation that had weak currency also had an easier time exporting its goods, which became cheaper. When the Europeans adopted a common currency, this safety valve was done away with, and fiscal prudence became a matter of negotiation between creditor nations and debtor nations.

The prospects for the EU and the common European currency look bleak Der Spiegel discusses the prospects in the latest issue of their magazine,and explains the options, ranging from further bailouts to austerity to reintroduction of local national currencies.

The difficulties faced by the EU are not new. When wealthy West Germany united with impoverished East Germany, they experienced many of the same tensions. In Italy, the wealthy industrial north subsidises the poorer Mezzogiorno region in the south.

The EU was formed in haste and in heady optimism that now seems incredibly foolish. Any solution to the problems of debt within the EU are difficult to solve without setting off a domino effect. It will take great skill for the EU to extricate itself from the problems it has created for itself.